In these difficult times, more and more tenants are finding that their leased premises are just not working for their business. Many tenants find that the lease that they agreed in the good old days is just not working for their business’ changed circumstances. But fear not, there may be ways out of a tricky situation as Sara Mounsey, a solicitor in our Real Estate unit, discusses.
My lease lasts for several more years do I have options to end it early?
Leasing business premises is often one of a businesses most significant liabilities. There’s the cost of rent, building repairs, decorating costs, rates, sometimes a significant service charge and insurance premiums. If the leased premises are too large or too expensive compared to the changed size and profitability of a business then it may be vital to the continued viability of the business to make a change. Luckily, there are nearly always viable options to pursue for a tenant struggling to pay its rent and fulfill its other responsibilities under a lease. There are 4 major options available to a tenant wishing to reduce its liability under its lease, namely:
1. Option 1: Negotiate with your landlord to end the lease early.
2. Option 2 : Look for a “break clause” in your lease and exercise it.
3. Option 3 : Find a buyer for your lease – also known as “assigning” your lease.
4. Option 4 : Think about sub letting all or part of the property to recoup costs.
It is vital to take legal advice early if your business is struggling with its property liabilities so that a change can be made to accommodate the business’ changing needs. Dependant on the scale of the problem a different option will suit a different business’ needs. Each of the four options is now discussed in more detail.
1. Option 1 : Negotiate with your landlord to end the lease early
If you are having significant issues with the continued viability of your business from its current leased premises then a good option may be to try and negotiate with the landlord to end the lease early. If the lease has a relatively short time to run and/or if the landlord is confident that it is able to re let the property quickly then it might be amenable to doing this. Landlords are generally reasonable and pragmatic and if they can see that your business does not have a reasonable prospect of paying future rental payments then they may see it as good business sense to cut their losses and allow you to end your lease early. It is important that you consult a solicitor early to make sure the deal agreed is properly documented to avoid any future liabilities under the lease. Some landlords will try to negotiate a one off payment from the tenant to compensate them for the loss of future rental income.
Option 1 : Upsides
· May end all future liability under the lease.
Option 1 : Downsides
· Landlord may not agree to it.
· Landlord may ask for a one off payment to terminate.
2. Option 2: Look for a “break clause” in your lease and exercise it
Some leases contain a right to end the lease early. This is called a “break right”. An example of a break right is where a tenant is permitted by the lease to end the lease early for example on the third anniversary of the start of the lease. A business tenant would be well advised to check its lease carefully to see if it can take advantage of such a right. Taking legal advice early is often advantageous since break rights can be tricky to operate successfully. Some break rights are conditional upon full compliance with all tenant promises in the lease and such conditionality can make the break clauses difficult to operate. Often formal notice must be given to the landlord to let them know that it is a tenant’s intention to end the lease early.
Option 2: Upsides
· May end all future liability under the lease.
Option 2: Downsides
· Not all commercial leases contain a break clause.
· If the break clause is conditional (eg upon performing all the tenant’s promises in the lease) then complying with the conditionality could be costly and the ability to break the lease successfully not certain.
3. Option 3 : Find a buyer for your lease – also known as “assigning” your lease
A business tenant may decide that the best option is to sell its lease and find alternative more cost effective and suitable premises for its business. You should check your lease carefully to see that you are permitted to assign your lease to somebody else. A well drawn lease will often allow you to sell your lease provided you obtain landlord’s consent and the landlord is usually not allowed to withhold its consent unreasonably. The landlord is likely to want to see detailed financial and other information about the proposed buyer of the lease. The landlord is likely to ask you to pay its legal costs in dealing with the issue of this consent. You are unlikely to get away without guaranteeing the new tenant’s responsibilities under the lease. Essentially, if the new tenant fails to pay the rent then you are likely to become liable. If your lease is dated before 1 January 1996 then you are likely to remain responsible for the default of all future tenants under that lease i.e. the incoming tenant and all its future assignees. If your lease is dated after 1 January 1996 then the usual position is that you are responsible for the default of the incoming tenant only. If the incoming tenant further assigns the lease then you should have no further responsibility for the default of that future assignee.
Option 3 : Upsides
· Allows your business to relocate to more appropriate premises.
· Often there is no further liability on you under the terms of the lease.
Option 3 : Downsides
· You may be forced to guarantee the incoming tenant’s responsibilities under the lease. If they fail to pay the rent then you may pick up this responsibility.
· Costs of relocation.
· Some leases may prohibit selling or “assigning” your lease.
4. Option 4: Think about sub letting all or part of the property to recoup costs
Often leases will allow you to sub let the whole or some part of the let premises to another person. This means that although you are still liable to the landlord under the terms of your lease for rent and other payments you can pass this charge down to your sub tenant. This can be a good option where, for example, part of the premises can practically be sub let and that area is not vital to the continued operation of your business. You should check your lease carefully as not all leases allow a sub letting of all (and particularly of part) of the leased premises. The consent of the landlord would normally be required although in a well drafted lease the landlord would not be entitled to withhold its consent to the arrangement unreasonably. The landlord may also be entitled to re charge its legal costs in issuing the consent to underlet to you.
Option 4 : Upsides
· Allows your business to relocate to more appropriate premises or use only part of the premises.
· A sub tenant should pay rent to you, offsetting the cost of your headlease rent.
Option 4 : Downsides
· You still have the primary liability to pay the rent and observe the lease covenants.
· You may incur costs in managing the occupation of your sub tenant.
· Not all leases allow you to sub let all (and particularly part) of your leased premises to someone else.
· Your sub tenant may default on its payments.
Deciding which option is best for your business
If the liabilities under a lease are putting a strain on your business it is vital to take early action before matters become worse. Langleys offer a broad range of legal services to business and personal clients and have the right expertise to help you decide how best to take your business forward.
If you would like further help please contact Sara Mounsey on 01904 610886 or email sara.mounsey@langleys.com.
Sara Mounsey is a solicitor in Langleys’ Real Estate Unit.
© Langleys Solicitors, 2011. This article applies to England and Wales only. Published for general information purposes only and not intended as legal advice.